A new norm will dawn
By Viv Williams
The future reality for firms is in stark contrast to the situation before the pandemic, as Viv Williams explains
When I was asked to write this article, the covid-19 pandemic had not yet the impact we’re seeing today. Where were we? Back then, the profession was facing severe difficulties in any event with succession still the dominant topic.
Mergers and consolidation were becoming hot topics with firms recognising that they could no longer continue as they were. Ageing owners and dwindling profitability were slowly taking their toll and many small firms were
seeking merger partners.
Sadly, many of these were unattractive to potential buyers and their only solution seemed to be controlled closure. The cost of this would be devastating for the current owners who had spent 30 years building a business no one wanted.
There are around 3,000 of these firms around the country, serving their community with traditional legal services generally delivered by partners charging an hourly rate that is no longer sustainable.
I was exploring the future of the legal market and how legislative change and the challenge of succession would impact the legal sector – identifying the new models and exploring the consolidation of the profession into much larger floated or private equity-backed practices.
I planned to explore how technology is changing the profession; how anything that can be processed is being processed, particularly in disciplines such as conveyancing.
I was intending to demonstrate how many firms were turning to offshoring for the administrative part of the conveyancing process, particularly on file opening and post completion. This could have reduced costs by as much as 40 per cent on a conveyancing matter.
Recently, I was speaking at the Conveyancing Association’s annual conference. One of the key messages was the effect of technology on the smaller firm’s ability to provide a profitable conveyancing service.
We have seen 700 fewer firms being able to offer conveyancing to their clients in the past year and (according to Land Registry statistics) of the 4,300 firms currently providing conveyancing, many would be unable to compete in the future.
One of the key outcomes at the conference was the prediction that this number could well be around 1,000 firms in the foreseeable future. We all know conveyancing was the life blood of many a practice providing quick cash flow that sustained the overall business.
If we also accept that many of the smaller and mid-tier firms are poorly managed, a hit on their cash flow could exacerbate the precarious financial position they find themselves.
I was going to explore how the new Solicitors Regulation Authority (SRA) Standards and Regulations (STARs) introduced last November would encourage regulatory mapping of a solicitors’ practice. For the firm, the cost of regulation is high – yet many of the services provided do not necessarily need to be regulated by the SRA.
By moving non-reserved activities into a separate business that would not be regulated by the SRA, the cost of regulation could be reduced. For example, many firms provide human resources and employment services to clients. These don’t need SRA regulation. Nor do the administrative functions need this level of regulation
Another trend has been to move residential conveyancing out of the core business and set up a separate limited company, perhaps regulated by the Council for Licensed Conveyancers (CLC) which provides lighter touch regulation and cheaper professional indemnity premiums.
These are some of the ways that firms could help reduce the cost of regulation. After all, one of the purposes of STARs was to allow solicitors to work for other businesses such as accountants, insurance companies and independent financial advisers.
The business itself would remain outside of the SRA’s regulatory remit, but the individual solicitor would be regulated by the SRA. This means the cost of regulation would be significantly less than a solicitors’ firm, creating an unlevel playing field.
The new chamber-type models have seen their first failures (Cubism then Cardiff-based Carbon Law have both entered administration). This is the model where individuals have left existing firms for whatever reason, and taken a following into these ‘eat what you kill’ type relationships.
This new business model provides an umbrella service of professional indemnity and some administrative support, and will split the fees depending on the relationship.
This is usually a 70/30 split but can vary from firm to firm – I have seen an 80/20 split and a 50/50 split if the work is being provided. Most of the solicitors in these models work from home (the forerunner of things to come?)
My intention was also to explore the effect on certain sectors such as legal aid and personal injury. The austerity measures had deeply effected legal aid firms, particularly criminal practices.
I was being approached weekly by both firms and banks to find homes for these practices nationally, but it was becoming increasingly difficult to find suitable merger candidates for them.
Additionally, the Civil Liability Act (now delayed until August 2020) will decimate the personal injury sector, with many firms either putting their personal injury books into run-off or selling the books of business to other private equity backed practices.
There are numerous smaller specialist firms within this sector which have become a cottage industry in clinical negligence and industrial disease. These firms are profitable, running a few hundred files without significant debt, but run by solicitors of a certain age without a succession plan.
I was also going to explore the succession issues facing around 3,000 firms. We have changed significantly since the SRA was born back in 2007. Back then, we only had the partnership model available.
This model meant no profits were retained in the practice and the individual partners became personally financially ‘comfortable’. As the partnership model gave the security of joint and several liability by the individual partners, the banks felt comfortable in aggressively lending to the sector and made more money from the legal profession than any other sector by utilising the large balances carried by firms in their client account.
Because of this – and because of the access to client account monies which they could lend to other businesses at high interest rates – all the banks loved to lend money to solicitors.
hat all changed some years ago because of Basel 3 and the banks’ liquidity issues. Few firms failed until the banking crisis in 2008; and only then did we start to see numerous failures and interventions.
In fact, in recent years the banks had been looking hard at the profession as a whole and at the numerous badly managed practices that have no fiscal knowledge.
Solicitors did not join the profession to manage a business, and the individual partners allocated responsibilities such as finance, compliance and marketing did not feel comfortable with their role.
Hence, the rise of the professional chief executive officer (CEO) – a non-lawyer running the law firm as a business. All the high street banks are aware of the challenges facing the profession, particularly in the personal injury and clinical negligence areas where the demand for working capital is no longer being supported as it once was.
While clinical negligence can be highly profitable, it often takes several years of funding requirement before profit is realised; and the appetite to lend against this uncertain future is becoming more difficult to obtain.
Today, we have circa 10,400 law firms of which 68 per cent are limited companies; 18 per cent are public limited companies (PLCs) and 14 per cent traditional partnerships – what a change in 12 relatively short years.
That’s a history lesson that changed forever in 2020. We will never return to the halcyon days of the past. If we could turn the clocks forward to this time next year, I wonder how much devastation this pandemic will have had on the profession.
Where are we now? We are all now on lockdown and maintaining social distancing if we venture out for essential supplies. Covid-19 has changed the world in a way we have never seen in our lifetime and none of us know where this might end. This could be the catalyst that changes the way legal services are delivered.
The impact on both individuals and business is devastating and as many as one million businesses could fail. Solicitors’ firms are not immune from this disaster with many firms seeing their new instructions fall by 60 per cent in the past few weeks.
The government has advised the public not to move house even if contracts have been exchanged, unless the completion date cannot be deferred; so conveyancing firms have had no option but to furlough staff where possible.
In my discussions with numerous managing partners, I suspect that even with home working the pipeline for existing work is around six weeks maximum. One firm told me it had 500 conveyancing transactions on hold which, by implication, means it cannot get paid for the work already completed on those files.
There has been a surge in wills and lasting powers of attorney; and there will undoubtedly be a big rise in probate work in the coming months. But that will not change the new normality of working from home. Some firms have heavily invested in technology allowing fee-earners and staff to successfully work remotely, but others have not.
Firms that have invested in cloud-based systems can provide incredible flexibility to their staff and fee-earners; and I would suggest travelling into a city centre office might have changed forever.
I was discussing with the managing partner of a successful, highly profitable practice that remote working had allowed them to close offices and reduce overheads. And he is of the opinion that this will be the new form of working – who can disagree?
The growth of Zoom and Skype has assisted may firms to conduct their business remotely. Even trial by Zoom and Skype has been successful and this technology will become normal long after the pandemic is over.
If we couple the use of such technology with those firms that have invested heavily in social media and other forms of digital marketing, they will see the rewards of such investment during and beyond this crisis, unlike the traditional practice that has not. Cost-cutting In the present uncertainty, firms will have to deal with the key issues head-on.
Accepting the government’s support and furloughing staff to ensure key workers are still employed is essential for when the crisis is over – cutting costs where possible until these measures can be eased. Firms that had a business survival plan should give them the edge over those that did not.
The underlying challenges facing the profession will not just go away. Some of the fundamental weaknesses could well bring many firms to the realisation that there is no future for them.
If your firm is facing these decisions, take professional support and advice sooner rather than later. The next few months will see even tougher challenges before it gets any better.
Viv Williams is a law firm consultant at Symphony Legal symphonylegal.com